Comment - Heineken Star Rises in Pub Galaxy
Heineken sees value in UK on-trade
Heineken's acquisition of the Galaxy Pub Estate reflects renewed optimism n the bedraggled UK on-trade.
At first glance, one might think it rather an odd move. Today (2 December), Heineken's UK business said that it would acquire 918 pubs that it has been managing for the past 11 years, for GBP412m (US$646m).
Hang on, isn't the UK on-trade as goosed as a radioactive contamination zone?
Part of it is, yes. And, here lies the key to Heineken's thinking. While it's no secret that tens of pubs are closing down every week in the country, and that consumers are increasingly buying their drinks more cheaply in the supermarkets, some of the on-trade sector is starting to see light at the end of the tunnel.
I recently attended a presentation by on-trade research specialist CGA Strategy, which is very much of the opinion that the UK pub business will emerge stronger for the torrid experience of the past few years. Few will say it, especially in the corridors of the British Beer & Pub Association, but the pubs closing down are generally the ones that have lost their connection with local communities, do not offer people a compelling reason to go out and have not woken up to consumer demand for decent food. I don't belittle the problems posed by higher duty, or regulation, or even exorbitant rents imposed by some firms, but the plight of pubs cannot only be blamed solely on external pressures.
CGA figures show that weekly pub closures have dropped to 14 in the UK, from a peak of around 52 in early 2009. For Heineken, then, it's not about buying pubs, but about buying the right kind of pubs; as rivals such as Greene King and Marston's have shown by increasing profits at family-oriented pubs that serve food.
Heineken's line is that much of Galaxy's estate is high quality, or at least has the potential to be. Government-controlled Royal Bank of Scotland has spent two years trying to offload the estate in order to cut debt, and Heineken, which already manages the same pubs - and even owned them before RBS - has been happy to oblige - at the right price, of course.
Profit margins in the on-trade are way ahead of the off-trade. This way, Heineken gets more control over the Galaxy estate's direction and can use its enlarged estate, which will amount to 1,380 pubs, as a shop window for its brands.
Inevitably, this is probably not a business model that would entice all brewers in the UK. There is also going to be a lot of hard work to do. But, there is sound method behind the apparent madness.
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